From the first mention of Schedule UTP, we felt that taxpayers would provide the minimum information required by the instructions and other published guidance for Schedule UTP. And it looks like this is what has happened. According to an article in Tax Notes Today, “[t]hirty-one percent of tax year 2011 Schedule UTP filers submitted incomplete concise descriptions of their uncertain tax positions.” According to Thomas Brandt, Director (Planning, Analysis, Inventory, and Research) for IRS Large Business and International Division, “The primary shortcoming of the concise descriptions that were deemed incomplete was that they did not sufficiently describe the nature of the issue or the relevant facts affecting the tax treatment of the position.” According to the Schedule UTP filing information, 1,862 taxpayers filed a Schedule UTP for 2011, a 21 percent decrease from 2010. However, the IRS sent 578 taxpayers education and outreach letters regarding the incomplete concise descriptions, compared to the three percent of 2010 Schedule UTP filers (or approximately 70 taxpayers).
The IRS has continued to provide guidance on what it considers to be a sufficient concise description for Schedule UTP. The IRS provides a table that shows examples of hypothetical concise descriptions that are insufficiently detailed and examples of sufficient concise descriptions. (The table is replicated below.)
|
Example |
Insufficient Concise Description |
Sufficient Concise Description |
|
1 |
This is a research credit issue. |
The taxpayer incurred support department costs that were allocated to various research projects based upon a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating these costs is acceptable by the IRS. |
|
2 |
This is a transfer pricing issue. |
The taxpayer allocated management service costs between its domestic subsidiaries and a foreign subsidiary located in Country X using a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating these costs is acceptable by the IRS. |
|
3 |
The Taxpayer claimed a domestic production activities deduction. The domestic production activities deduction is highly factual and subject to review by the IRS. |
The Taxpayer claimed the domestic production activities deduction on certain production activities income for 2011. The issue is whether costs incurred for product aging processes that occur in designated areas located at the Taxpayer’s distribution facility are considered manufacturing or production costs of the tangible personal property, and therefore, a component of Qualified Production Activities Income. |
|
4 |
The Taxpayer incurred costs during the year that are deductible as ordinary and necessary business expenses under IRC Sections 162 and that are included in “Other deductions” on Line 26 of Form 1120. |
The Taxpayer claimed a deduction for travel and entertainment expenses for conventions and sales meetings. The issues are whether adequate documentation has been retained to substantiate the deductions claimed and whether some of the expenses constitute entertainment subject to a 50% limitation. |
Despite the examples only providing vague facts that would identify the issue, taxpayers are providing fewer descriptions that are sufficient to identify the particular issue that the reserve was created for. The resistance to providing sufficient information makes whistleblower information even more valuable to the IRS when preparing an audit plan for these entities. Even if the taxpayer is providing sufficient concise descriptions, the descriptions still fall short of the detailed information that whistleblowers provide to the IRS. For example, the IRS guidance provides that a sufficient concise description for a transfer pricing issue could be:
The taxpayer allocated management service costs between its domestic subsidiaries and a foreign subsidiary located in Country X using a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating these costs is acceptable by the IRS.
A whistleblower would provide the IRS with information regarding the methodology the taxpayer used and an explanation as to why that methodology may by flawed in light of the facts and circumstances or how that methodology was improperly applied to the facts and circumstances.
While Schedule UTP may provide the IRS with a description of the relevant facts affecting tax treatment of the position, whistleblowers provide the IRS with information and analysis that goes far beyond merely apprising the IRS of the identity of the issue beyond issues that a reserve has been established for. A whistleblower is even more important in identifying potential tax issues where taxpayers are not filing Schedule UTP, are not reserving for tax issues, or are not providing sufficient concise descriptions.
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